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What's needed to prolong the economic recovery?

October 3rd, 2016

Federal Reserve Bank of Cleveland President Loretta Mester spoke last week at the Greater Cleveland Partnership’s Third Quarter Middle Market Forum attended by more than 70 CEOs from GCP/COSE middle-market and small business investor companies.

In her remarks, Dr. Mester, a nonvoting member of the GCP Board of Directors, said that an increase in the federal funds rate is appropriate and would help prolong the economic recovery.

“The reason I believe a gradual upward path of policy continues to be appropriate and that I favored taking another step on that path in September is because of the realized progress the economy has made on our monetary policy goals and my expectation of further progress,” she said. “That expectation is based on my outlook for the economy.

“So today, I would like to discuss my outlook for both the national and regional economy and my views on monetary policy. Of course, these are my own views and not necessarily those of the Federal Reserve System or my colleagues on the Federal Open Market Committee.”

All forecasts carry risk

She noted that “All forecasts carry risk, and sometimes it is difficult to extract the signal about where the economy is headed from noisy economic and financial market data.

“With those usual caveats, my modal forecast is that over the next couple of years, the U.S. economy will expand at a pace at or slightly above its longer-run trend, which I estimate to be about 2 percent; that the unemployment rate will move further below its longer-run level, which I estimate to be about 5 percent; and that inflation will continue to gradually return to the Federal Reserve’s 2 percent target.”

Outlook for the regional economy

Dr. Mester also provided a perspective of the regional economy. “The Cleveland District comprises all of Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia," she said. Our regional economy is quite diverse, but the path of economic expansion here and the outlook are similar to the nation’s.

“To be sure, our region tends to be more dependent on manufacturing than other parts of the country. For example, manufacturing accounts for 15 percent of private-sector jobs in Ohio compared to about 10 percent in the U.S. as a whole. So the region has borne the brunt of the weakness in manufacturing.

“Similarly, the region had enjoyed the benefits of a sharp increase in production and employment in the oil and gas extraction sector as new technologies were brought to bear, but the sharp drop in oil prices since mid-2014 has resulted in a significant slowdown in natural gas and oil exploration in the Marcellus and Utica shale regions, which include northern Ohio and western Pennsylvania.

“The weakness in the energy sector is expected to persist somewhat longer, and the longer-term shift away from coal as a source of energy will have lasting effects on the coal-producing parts of the region that have not diversified their economies.4

“On the other hand, the region has benefited from the strength in auto sales, construction, and the service sector, including health and education. We are seeing a modest pickup in regional manufacturing, particularly in firms that are more focused on domestic markets and the auto sector…

“Housing markets in the region have shown improvement over time. During the housing boom, we didn’t see the sharp increases in home prices experienced in other parts of the country. But we did suffer from the housing bust with a large number of foreclosures and vacant properties. The situation has improved. “

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